It will soon be joined on the market by a bigger Ford Fiesta, and a Citroen C3 which will sit between the Saxo and Xsara.
The Lupo is already as big as the original Polo launched in 1975, and the current Polo is as big as the 1974 original Golf. Likewise the Ford Ka is as big as the original Fiesta, and the new Fiesta is considerably larger than any of its predecessors.
The new Polo goes on sale in Germany this month and is estimated to fit between Mk 2 and Mk 3 Golf in size. It's loaded with big-car features. Standard kit across the range in the UK includes ABS and twin front and side airbags.
Like the Golf - which has air conditioning as standard from S models upwards - air-con comes in from S trim, but like the Peugeot 206 customers will have to specify an S car with air conditioning, because they also come without.
However, Volkswagen has managed to negotiate a lower cost with its supplier, so customers can expect a £300 reduction over the £860 charged on the current model.
The new unit, Climatic, is a semi-automatic system where the temperature can be set with manual adjustment of the fan. There is also an upgrade to the fully automatic Climatronic system found other Volkswagen models.
The message from VW's German PR people was the new Polo is a bigger car, but customers will get better value through the extra equipment and there is not expected to be much change in prices over the outgoing model.
The Polo has two new three-cylinder petrol engines (replacing the current four-cylinder 1.0-litre) and there will be a new direct injection petrol unit joining the range later next year. The lesser-powered 1.2-litre (64bhp) will not be available at launch in February, nor will a 99bhp 16-valve 1.4.
Diesels include a 1.9 SDI developing 64bhp, a 1.4-litre three-cylinder TDI PD producing 74bhp, and a 99bhp 1.9 TDI, the former pair already available in the existing Polo, while the 1.9 TDI can be found in other VW Group models.
The German technical experts were keen to point out that the TDI engines will meet German D4 emissions criteria which would mean German drivers would qualify for tax breaks. But these rules have no relevance outside Germany and there was no news on when the engines would meet the more stringent Euro IV rules.
The current Polo has the strongest residual values in its sector, and there is no reason not to believe the new car will follow suit.
Martin Ward, national research manager at CAP Network, said: 'Demand for the Polo will be strong as a new car, but if cars cover a low mileage and come back in three years with only 30,000 - 40,000 miles on the clock they will be much sought after as used cars.'
So Volkswagen has thrown down the gauntlet to Ford and other rivals with the new Polo, and although the Fiesta is likely to also be a best seller, the Polo will still be the quality benchmark for the class.
It's difficult to be surprised by a new Volkswagen these days. Peerless build quality is taken for granted, as is driving satisfaction, but these factors should not take anything away from the fact that the new Polo is a likely class leader against some stiff competition.
The design is familiar - from some angles the Polo looks like a Lupo enlarged to 120 per cent on a three-dimensional photocopier.
The interior is spacious front and rear, while the driver has a sporty four-spoke steering wheel and Volkswagen's trademark blue back-lit instruments.
The only trouble with the interior is a separate piece of trim bridging the gap between the base of the windscreen and the dashboard. It does not reflect the quality of the rest of the cabin and looks out of place. The boot is big for this class, easily swallowing a couple of suitcases with room to spare.
During the launch I drove cars with most of the engines that will be available when the car goes on sale in the UK in February, and my favourites were the 12-valve 1.2-litre petrol engine and the 1.4 TDI. Both are three-cylinder units, with the petrol engine new and surprisingly torquey.
It's easy to dismiss the three-cylinder as being one short of a full block, but I do like its occasionally sporty half-a-V6 howl.
This 1.2 example is particularly frisky, developing 83lb-ft of torque at 3,000rpm, and has decent pulling power up to about 5,000rpm.
The Polo rides comfortably, but the steering lacked feedback, taking some of the enjoyment out of tackling twisty roads. Body roll is well contained and the Polo copes with sudden direction changes with a minimum of fuss.
The 1.4 TDI is carried over from the current model, but is the most frugal engine in the range and still offers good performance. It isn't particularly quiet, but I preferred its off-beat snarl to the gruff four-cylinder 1.9 TDI. The 1.9 TDI joins the growing ranks of high-performance small diesels and is currently the fastest car in the range. It is likely to remain so until VW announces plans for a GTI version.
Meanwhile the entry-level six-valve 1.2 provides adequate performance and thanks to its high torque, will permit overtaking as long as it is kept around the 3,000 - 4,000rpm mark. The 74bhp 1.4 offers sprightly performance, good fuel economy and a refined engine.
The new Polo is a an all-round improvement over the current model and does everything you expect a small car to do with finesse. Driver enjoyment is hampered by vague steering, but overall driver satisfaction will be high thanks to its supreme quality and wide range of engines.